Your Money: Use 1999 tax return for 2000 financial planning

CBS.MarketWatch.com

CHAPEL HILL, N.C. (CBS.MW) -- Now that the late-setting sun provided extra evening energy to finish your tax return, set your clock to Tax Savings Time (TST) and take steps to make your tax picture brighter the rest of the year.

Your tax return is a great starting point to tune up your budgeting, savings, use of credit and other financial planning strategies.

Ideally, you should have started tax planning Jan. 1, though there's still plenty of time to use what you've learned from your 1999 filing to make things better next April.

Your tax return also is a great starting point to tune up your budgeting, savings, use of credit, and other financial planning strategies that will make paying next year's taxes easier. Here's how to set yourself for TST.

New tax-year resolutions

Start by resolving to make this the last year of last-minute scrambling to get your tax records in order for yourself, your preparer or your software.

"If you bite the bullet and recreate January through April now, your investment in organization will reap immediate Year 2000 dividends," says Cynthia Meyers, a certified financial planner. She and another CFP, Marc Freedman, suggest these potentially high-return resolutions:

Withholding: Meyers implores, "stop giving Uncle Sam a free loan!" With your newly-organized records, use this quick tax estimator to approximate your Year 2000 refund, and then file a new W-4 to get it in this year's remaining paychecks instead. Of course, you might discover you are underwithholding, so a new W-4 will help you avoid interest and penalties. Many people don't realize that W-4 allowances don't have to match your actual 1040 exemptions," adds Freedman. "The right number is what will come closest to making your tax liability zero next April."

Budgeting: If you do need extra withholding, but can't comfortably afford it, it's time to take a hard look at your budget--especially if you've just put your 1999 IRS tab on plastic. Meyers suggests that in making your post-tax budget, "you should look at the bigger issue of your lifestyle and goals -- and whether your spending and savings are helping you get what you really want from life."

Tax-Advantaged Employer Retirement Savings: "When people have just paid taxes, they often reflect on how much more money they're making, and that's the perfect time to up their savings accordingly," Freedman says. Start with your 401(k) and take advantage of this year's $10,500 maximum pre-tax contribution, up $500 from 1999. 401(k) advocate Tim Younkin says to make sure you add the full employer-match benefit to your tax savings. "The way some employers do their matching, if you contribute the maximum percentage per paycheck (often 15 percent) and max out the $10,500 early in the year, you won't get your full employer match." To remedy this, adjust your per-paycheck percentage so that you'll reach the $10,500 max at year end. "401(k) max contributors should start saving an additional $2,000 ($4,000 married) to take advantage of the Roth IRA," Meyers says. "You forego immediate tax savings, but get all earnings tax free in retirement."

Tax-Advantaged Self-Employed Retirement Savings: The Simplified Employee Pension (SEP) is a great way for self-employed folks to save for retirement," Meyers says, "but, again this year, I heard of people who waited until now to make a last-minute 1999 contribution, and couldn't ante up as much as they would have liked." Meyers says that a SEP allows you to contribute roughly 13 percent of your (before contribution) earnings, up to $24,000, reducing your taxable income accordingly. To take full advantage, Meyers suggests setting up your SEP with a automatic contributions to a mutual fund from the account in which you deposit your self-employed earnings

Tax-Advantaged Small-Business Retirement Savings: If you own a small business, it's understandable why you might reject the cost or complexity of a SEP or 401(k). "But a SIMPLE (Savings Incentive Match Plan for Employees) is simple and cheap," Freedman says. "It allows you to contribute up to $6,000 pre-tax for yourself, while providing only a small match to your eligible employees."

''If your accountant hounded you for mutual-fund and other investment statements, there's good reason.''

Marc Freedman, financial planner

Mutual Funds: "If your accountant hounded you for mutual-fund and other investment statements, there's a good reason," Freedman says. "Without an accurate, substantiated cost basis, you'll overpay capital-gains tax, so get your records in order now for next year." He also advises contacting funds in which you might make new investments to find out if and when they'll make capital-gains distributions this year. That way, you can avoid investing near to any distributions, so that you won't be taxed on gains that didn't benefit you.

Stock Options: "Many people just had unpleasant surprises from the tax consequences of exercising stock options last year," says Meyers. "It might pay to consult an accountant or financial planner to develop a tax-minimizing strategy for exercises in this and later years."

Other planning tips

After making all these tax-related adjustments, don't put your records away -- especially if your taxes were more complex this year. Instead, add your estate-planning documents to the pile and contact your attorney to update them -- or make your first will. According to Meyers, "many people need to add power-of-attorney and living-will documents, and others now have more wealth and complicated circumstances that could warrant a trust instead of a simple will."

If your new estate planning reveals a need for more life insurance, take the opportunity to review your other insurance with your agent. For example, the hot housing market might mean your coverage has fallen below the 80 percent of replacement cost needed to fully cover damages to your home. Furthermore, your added home equity and other wealth makes you a deeper-pocket target for lawsuits, so additional umbrella liability coverage is warranted.

"Finally, to protect your ownership of that appreciating home, consider this recent surge in interest rates as a warning that you might want to convert your variable-rate mortgage to a fixed rate," Meyers says. If you do, there's a side benefit: By knowing your future interest payments, you can do better tax planning.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.